Indian Aviation: The Financial Nosedive Decoded

Photo by Daniel Eledut on Unsplash

What is the fastest way to become a millionaire? “Start off as a billionaire and join the airline industry,” joked British entrepreneur Richard Branson.

But in all seriousness, it is no secret that India’s aviation industry has been struggling for decades. All major airlines have been running losses in India, from AirAsia to Vistara, and the famed Kingfisher Airlines even went bankrupt in a drastic saga which turned famed businessman Vijay Mallya into India’s most wanted financial absconder. Even IndiGo, the one major Indian airline that had just managed to stay profitable, ran a loss at the beginning of the COVID-19 pandemic.

Perhaps the most perplexing part is that India’s aviation industry is growing massively in terms of passengers yet still manages to shrink economically.

This story poses many questions with fewer answers, yet the questions must be resolved in order to place Indian airlines on the world aviation map. And the story begins in 1932 on a sunny day over the blue skies of the Arabian Sea.

High Flying, High Turbulence: A Brief History

Few at the time would have missed the historic moment when JRD Tata completed the first flight of Air India from Karachi to Mumbai.

It was a cargo service, not passenger yet, but the young entrepreneur was nowhere near done. For him, Air India had to become India’s leading light.

Yet post-1947, the dream did not proceed as planned. Deeply inspired by socialist principles, India’s first prime minister Jawaharlal Nehru went ahead and placed all sectors of the Indian economy under government control.

JRD Tata and Air India would not escape their fate. In a heated meeting, PM Nehru had infamously told Tata to “never talk about profit (as) it is a dirty word.” With that, Nehru began the process of nationalising Air India, and by 1953, the Indian government had secured a 100% stake in the flagship airline.

Still, Tata remained the chairman of Air India for 25 more years, and within that time, Air India truly reached its potential. Often criticised by his colleagues for spending all his efforts at a company from which he gained no profit following nationalisation, Tata always maintained that this was his dream project that he would remain dedicated to regardless of the lack of monetary incentives. Even while working within the suffocating regulations of the socialist governments, Tata managed to make Air India the symbol of the country that it was destined to be.

However, in 1978, JRD Tata was removed from the Air India board by then-PM Morarji Desai, and Air India fell into the leadership of government officials whose sole job was to maintain the airline rather than grow it like a visionary. From then on, the problems began. As an article by Vir Sanghvi in The Print observes, Air India succeeded because despite nationalisation, the government left it alone in the hands of a person whose passion could take it forward.

Without Tata’s vision and further damaged by some external factors, Air India lost its pole position, and the monopolised industry struggled.

As part of economic liberalisation in 1991, however, the Narasimha Rao-led government permitted private India airlines to fly Indian skies for the first time since 1953, albeit with many choking restrictions.

In this time, many household names rose to the forefront. IndiGo and SpiceJet emerged, and Tata even re-entered the market with Vistara and AirAsia-India. Vijay Mallya’s Kingfisher Airlines had an energy similar to what JRD Tata had created, and Jet Airways had made no less of a mark.

Yet even in the private age, airlines managed to nosedive. Kingfisher went bankrupt in the dramatic downfall of Vijay Mallya, Jet Airways suffered a recent bankruptcy near the beginning of the COVID-19 pandemic, and countless other airlines have also been permanently grounded. Not even Tata’s Vistara could create a big-hit brand, and IndiGo, the master of low cost flying, recorded its first loss since going public in 2015.

As for Air India, the airline has been running huge losses for decades, and only taxpayer funds have kept it in the skies. With the mess aviation is in, the sale of Air India back to the Tata Group comes as a welcome development, yet problems persist nonetheless. What exactly plagues the industry, and can the Tatas reverse the trend in the second innings of Air India?

Cost of Doing Business: Oil Prices, Aircraft Leases, and the Fall of the Rupee

Airline executives watch oil prices closer than anyone else. For them, oil can make or break a profit.

The Boeing 747, currently run on a large scale by Air India, can use up to one gallon of fuel per second. As oil prices continue to rise due to lower production rates from OPEC countries, the world’s leading oil producing block of nations, airlines have incurred a massive jump in fuel costs, which has upset balance sheets significantly.

To add to the oil woes, the Indian government, which has historically seen flying and thus jet fuel as a luxury, imposes a luxury tax of roughly 30%, making the already expensive oil even more expensive for Indian airlines.

Another major factor that lies beyond airlines’ ability to control yet very well within their balance sheets is the rupee’s depreciation against the dollar. Indian airlines keep rupees in their bank accounts, yet plane leases with foreign companies (which entails nearly all planes as no major Indian manufacturer exists) still have to be paid in US dollars. As the rupee’s value depreciates, the lease rates in rupees soar to even higher heights than the planes themselves.

Simply put, the cost of doing businesses has been in an upward trend for years, and in a low-cost market like India where profit margins remain thin, rising costs derail even the most successful business models.

Unions: Business’ Worst Nightmare

When JRD Tata created Air India’s passenger services, he wanted it to be renowned for its ‘Indian hospitality.’ To achieve this, he placed a special emphasis on a perfectly trained crew.

Now, instead of being the biggest asset, Indian airlines have found their crews to be one of their biggest headaches.

Currently, there is a major shortage of skilled crew in the Indian market, and whatever is there is highly unionised. These unions constantly resist any measures such as salary cuts or even the rollback of certain bonuses. Since airlines cannot afford to lose the crew they have, the unions are almost always successful.

At the end of the day, private companies have it better. At least they keep their employees accountable to performance regardless of the compensation they have to give. The government-owned Air India hardly even ensures performance while giving government pension to all its employees. Indian government pension comes at major costs to the government while being extremely ludicrous for those receiving it.

In fact, many Air India employees are known to put on weight just to get paid holidays; overweight employees are grounded yet still receive their paychecks and are guaranteed a job when they return. No wonder the Air India unions protested the sale of the airline to Tata Group: many inflated benefits will disappear.

Air India has lured most of the skilled workforce because of its size and its benefits. It is yet to be seen how unions will fare now that the entire industry is private, but airlines will still have to manage a difficult workforce in the years ahead.

Airfares: Flying in a Frugal Country

In a country where the average annual income is 1670 USD, it should not come as a surprise that nobody can or will pay hefty airfares.

Currently, only Air India and Vistara operate full-service domestic flights in India. For all airlines, providing the cheapest tickets is not just a goal but a necessity.

With the amount of competition in the market, airlines struggle to provide the lowest fares and are forced to run loss-making operations simply to offer ticket prices that price-sensitive consumers are willing to pay. If one airline raises prices, they will be driven out of the market by other low-cost providers.

Most airlines look to international routes in order to find some profitability, yet even that is not a foolproof strategy.

Snapping the Lifeline: International Routes and the 5/20 Rule

In order to ensure that airlines in India primarily offered domestic flights and did not become international-specialists, the more economically viable option, the Indian government in 2004 introduced the controversial 5/20 rule. This rule made it where an airline had to operate at least 20 aircraft for 5 years domestically before flying international routes, which were much more profitable.

Most analysts allege that this move was made to keep Air India’s monopoly on international routes by keeping potential competitors away from the international profits, and for a major part of time, this was the case. Only Jet Airways was able to fly internationally alongside Air India for a major portion of time. Now, others such as SpiceJet and IndiGo meet the criteria, but the rule remains one of the largest hurdles for newer airlines, effectively acting as a blockade to competition, and the big players don’t mind this. “It may seem a little ironic that SpiceJet and IndiGo, which once complained of being held back by the 5/20 rule, now support it against Vistara and AirAsia India. But that’s what happens when competitive interests and a severely imbalanced playing field collide,” an AirAsia India executive told The Wire in an interview.

The traditionally non-confrontational Tata chairman Ratan Tata claimed that this rule was “reminiscent of the protectionist and monopolistic pressures” practised by vested interests in other sectors. Vistara began operations in India in 2015, and recently began international flights after struggling for the required 5 years of purely domestic operations.

The 5/20 rule is also largely credited with Kingfisher Airlines’ downfall. Kingfisher was financially struggling in India, and to make ends meet, Vijay Mallya approved the purchase of Air Deccan, which could fly internationally. The sale did allow more revenue into the company, yet Kingfisher struggled to operate two separate airlines with different price ranges and customers. Many agree that Kingfisher would probably have survived if not for this monopolising regulation.

There is no clarity as to whether the rule will be scrapped or not; it is currently being amended to a less severe yet still restricting clause. What is not unclear, however, is that the 5/20 rule aids a monopoly of established players, making it difficult for new entrants to survive the initial phase and thus hurting the industry as a whole.

One Runway for All of Mumbai: Infrastructure, or Lack Thereof

Much glamour has been given to the airport redevelopment projects across India. From Ahmedabad to Bengaluru, airport terminals in India have been upgraded on a public-private-partnership (PPP) model. In this method, a private company renovates the airport and gets to operate the airport, and they get a small percentage of ticket sales in return (which just makes ticket prices rise slightly at these airports without hurting airlines’ profits).

The problem with this model is that only the terminal capacity is increased. The problem remains the amount of planes that can actually fly in and out of the airport.

Mumbai’s Chhatrapati Shivaji International Airport, which serves the second most populous city and financial capital of India, has the dubious tag of being the world’s largest single-runway airport. Yes, Mumbai Airport has only one runway. There is a crossing runway, but crossing runways cannot be used simultaneously; it only ensures that the airport itself rarely has to cease all flights for technical reasons. The operators of the airport do remarkably well to keep the flight capacity as high as it is, but Mumbai’s capacity is severely restricted because of the lack of infrastructure.

Regional airports face the exact same problem as Mumbai. Ahmedabad and Patna, both emerging Tier-II Cities, are stuck with single runway airports as well. Between 75–80% of Indian air traffic has a Tier-I metro city (Delhi, Mumbai, Kolkata, Chennai, Bengaluru, and Hyderabad) on at least one end, and this is in large part due to the lack of regional infrastructure. With airlines unable to fly between Tier-II cities on large scales, a passenger wanting to fly from Ahmedabad to Patna will have to go via Delhi. In fact, if a person wants to go from Ludhiana to Mumbai, there is a good chance that he will go to Delhi airport on the ground and then take the flight to Mumbai. This clogs metro cities’ airports even more and prevents airlines from taking advantage of much potential passenger growth.

Additionally, with the supply of flight slots significantly under the demand, the price of operating flight slots rises, and if airlines have to pay more to even be able to fly,p without getting a similar return on airfare prices, profit margins dip even further. The lack of infrastructure poses another major hurdle in India’s aviation ambitions.

Air India: How the Government in Business Murders Business

Air India has been making losses for decades, yet the government has hardly done anything to make the airline more profitable.

And why would it? After all, there is an abundance of taxpayer funds to cover for the losses. As a result of this mindset, Air India has kept its fares extremely low, and other airlines are forced to keep that standard in order to stay relevant.

The problem is that unlike Air India, private airlines do not have unlimited access to taxpayer funds to cover their losses for decades. As a result, even the biggest hits like Kingfisher Airlines and Jet Airways have shut shop.

Governments can afford a lot more than private corporations, and when prices are kept artificial, somebody is going to suffer. In the case of low prices, the airlines suffer massively. Now that Air India has been privatised, the airlines can hope for an increase and prices that will give their revenue a much needed boost.

Another problem with the government being in business is favouritism. In Bollywood movies, very rarely is an airline other than Air India shown, probably at the direction of the Censor Board. This is free advertising for Air India, unfair for the rest.

Additionally, whenever the Indian government signs a bilateral agreement with other countries to open new flight routes, Air India is always the Indian beneficiary. Private airlines are forced to create their own path to compete with a state-backed mega-airline.

At the end of the day, the government, through all its resources and abuses of power, murders business simply by participating.

Air India’s Ghar Wapsi: The Skies Ahead

90 years after JRD Tata’s maiden flight touched down in Mumbai and 69 years after its nationalisation, Air India has finally returned to Ratan Tata, who appears as dedicated as his uncle in running this airline.

The sale marks a watershed moment in Indian Aviation. Finally, the government has left the field, and a conglomerate with no shortage of cash can infuse much needed cash into the sector.

One question that remains is how Tata will integrate Air India into its already established aviation sector with Vistara and AirAsia-India. Preferably, Tata would like to merge all 3 airlines, but this seems difficult at the moment. Vistara is 51% owned by Tata and 49% by Singapore Airlines, and AirAsia India is 83.67% owned by Tata and 16.33% by Malaysian Airlines. Both non-Tata stakeholders are reluctant to accept a merger, possibly due to the fact that their equity in the proposed mega-airline will be negligible as Tata owns 100% of the elephant of aviation, Air India. For the merger of a company, a 50% board majority is nowhere near enough, so Tata will have to get its partners on board for any such move to be successful.

While Tata can hope that they agree, the possibility that they won’t remains large, and in that case, Tata has two options. First, they can operate all 3 airlines separately. This will lead to an inefficient distribution of resources and internal competition, yet formulas can be figured out to where the 3 airlines run different sectors of the aviation industry and cooperate in certain areas. Another very likely possibility is that Tata sells its stake in Vistara and AirAsia-India and concentrates solely on Air India.

Air India comes with a huge crew, a massive fleet of aircraft, and premier slots at airports across the globe courtesy the Indian government’s monopolisation of the field that Tata can now take advantage of. Air India has everything except cash and a workable cost model, and Tata is more than capable of infusing both those things while milking profits off the ludicrous asset collection.

Other airlines remain optimistic as well. Finally, Air India will not gain further unfair advantages in the market due to government patronage, airfares can rise to sustainable levels, and crew unions will become that much weaker.

The skies ahead look bright. Entrepreneur Rakesh Jhunjhunwala has entered the playing field optimistically with Akasa Air, the full privatisation of aviation will give airlines some breathing space, and even the COVID-19-induced passenger drop is lifting.

Tata still has much to deliver; everybody does, but the potential cannot be missed. Finally, the clouds seem to be clearing, and optimism prevails. Ratan Tata’s legacy defining statement says it all.

“Welcome back, Air India!”